Federal Open Market CommitteeConference Call

April 28, 1981

PRESENT: Mr. Volcker,Mr. Solomon,Mr. BoykinMr. CorriganMr. GramleyMr. ParteeMr. RiceMr. SchultzMrs. TeetersMr. Wallich

ChairmanVice Chairman

Messrs. Balles, Black, Ford, and Winn, AlternateMembers of the Federal Open Market Committee

Messrs. Guffey, Morris, and Roos, Presidents of theFederal Reserve Banks of Kansas City, Boston, andSt. Louis, respectively

Messrs. Doyle and Smoot, First Vice Presidents, FederalReserve Banks of Chicago and Philadelphia,respectively

Axilrod, Staff DirectorAltmann, SecretaryKichline, EconomistSternlight, Manager for Domestic Operations,System Open Market Account (New York)

Note: A complete record of staff attendance at this session was notavailable in the Committee's files.

Transcript of Federal Open Market Committee Conference Call ofApril 28, 1981

CHAIRMAN VOLCKER. [Unintelligible] money supply figure. Thenext money supply figure, in case any of you don't know it, shows asizable increase, which is not particularly in line with anybody'sexpectation or projection and puts us well above the last path we had.I'll get to that in a minute, but I want to put it in the perspectiveof these seasonals. And I'm afraid there was some misleading of theCommittee at the last meeting in that it was said that it just doesn'tmake much difference. It makes quite a lot of difference--not theseasonal changes themselves, but how we treat NOW accounts. On theseasonals themselves, a tentative decision has been made to use thetechnique which, in effect, knocks out April to September of lastyear. If we don't, and just run an ordinary seasonal, a lot of theseasonal adjustment factors move in the opposite direction from [theway] they have been moving in recent years and the year-to-yearchanges in seasonal adjustment factors are much bigger than has beentypical. There are 0.5 changes and 0.6 changes in particular months,which is very exceptional and doesn't look very reliable. Moreover,the other technique is at least consistent with what our outsideconsultants said to do when we had something unusual occur in a seriesin the space of a year. Also, it gives seasonal adjustment factorsthat are at least no more different than they ordinarily are; theychange either 0 or 0.1 or, in a few months, 0.2; and they all tend tomove in the same direction they have been moving in recent years. So,tentatively at least, we're operating with those kind of revisions inthe seasonals.

As for NOW accounts, we are putting in the NOW accounts andseasonally adjusting them. Of course, they've gotten quite big thisyear, and there is a decision as to what to do. I think we can saythere is no right way of doing it. We don't have any history thatgives a particular seasonal for NOW accounts. We could do what we'vebeen doing up to now, which is to assume they have no seasonal. Wecan do what we are tentatively doing, which is to assume that theproportion of NOW accounts that came out of demand deposits acts likedemand deposits and the other portion acts like savings accounts. Orwe can just seasonally adjust the [M1] series with NOW accounts in it,which is presumably what we would do in the long run. But, of course,we haven't got much experience for that either. So, tentatively, whatwe're doing is taking that middle course, which is to seasonallyadjust the total of M-1B adjusted, in effect; and we get a seasonalthat is almost the same as the demand deposit seasonal, but there's abig difference in the fact that we're including NOW accounts where wedidn't before. This question arose at the Committee meeting [in lateMarch], and the response was that it didn't make much difference.Well, it turns out that it makes quite a lot of difference on a month-to-month basis. An advantage of publishing this now is that it makesalmost no difference from December through April. In other words, itwould not change the April level appreciably. It would raise it by$100 or $200 million or something, according to our current estimates.But it does not make a very appreciable difference for the wholeperiod from December through April. It does make a big difference forparticular months. I'll read you what we tentatively have for themonthly adjusted figures.

MR. PARTEE. For M-1B.

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CHAIRMAN VOLCKER. What we now have shows: +1.5 in January;-2.3 in February; and +8.2 in March. Just extrapolating what we have,with that big jump in the week we haven't published yet, April wouldbe +18 percent. Now, choosing the seasonal that includes in effecttwo-thirds of the NOW accounts or a little more than that for theearly part of this year, the monthly numbers would be: January, +4.1;February, +2.3, which is a particularly big change; March, +7.3; andApril, +13.6. The quarterly change, which on the old method was-.2, becomes +1.3. The December-to-April seasonally adjusted annualrate, again using that April estimate, is 6.3 percent on the old basisand approximately 6.9 percent on the new basis. That change of about1/2 percentage point is only a third of [the difference in thequarterly change] because this seasonally adjusted annual rateactually looks at the April level. The difference in the April levelis between 0.1 and 0.2 percent, and 0.1 is maybe a little more than$400 million, I guess.

MR. AXILROD. Well, it's about 0.2 off.

CHAIRMAN VOLCKER. It obviously shows a smoother pattern onthe new basis, but it doesn't change the general trend. April looksmuch lower and February looks much higher. Let me just stop there andsee whether there are any questions or comments.

MR. BLACK. Mr. Chairman, Bob Black. I commend you for this.I think this really ought to be done.

CHAIRMAN VOLCKER. Well, I think it ought to be done, too.But I'm not very happy about the fact that it involves such bigchanges and that the pattern looks somewhat different than what we hadbefore.

MR. BLACK. But if we end up with 13.6 percent in April, thatwill look a lot better than 18 percent.

CHAIRMAN VOLCKER. I agree with that. People will say that'swhy we did it.

VICE CHAIRMAN SOLOMON. Paul, when we publish this on Friday,if that's what you intend to do, are we going to give it month bymonth?

CHAIRMAN VOLCKER. Yes, we'll give the back data for lastyear and all the back data for this year, including the weeklynumbers. We haven't got the weekly changes worked out yet. Itobviously won't change the direction of week-to-week movements, but itwill change the week-to-week movements in some way that correspondswith this monthly change.

VICE CHAIRMAN SOLOMON. But the week-to-week numbers thatwe've been publishing--

CHAIRMAN VOLCKER. We would also publish a long explanationof just what we did.

VICE CHAIRMAN SOLOMON. All right. And in the future when wegive the monthly adjustments for the correction of the NOW accounts,we would give it seasonally adjusted?

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CHAIRMAN VOLCKER. Well, that adjustment factor I don't thinkis seasonally adjusted, but we will show the adjusted figuresseasonally adjusted. We have two adjustments here: The firstadjustment is called shift adjustment; the second adjustment is calledseasonal adjustment. We will print seasonally adjusted, shift-adjusted, figures.

VICE CHAIRMAN SOLOMON. And that will be just once a month?

CHAIRMAN VOLCKER. Yes.

MR. SCHULTZ. And that's going to clear everything up!

CHAIRMAN VOLCKER. Now, on this seasonal--nobody knows whatMay is going to bring anyway--it reduces the April growth and it wouldincrease whatever May growth there is. Or if May went down, it wouldgo down less because the seasonal happens to work in the otherdirection. The way it works out, these NOW account additions don'tmake much difference on a quarterly basis. But they make a lot ofdifference in the months within a quarter. The seasonal adjustmentfactor tends to come back to about the same thing in the first monthin every quarter as a kind of first approximation. So, when you lookat a figure from January to April, or April to July, or July toOctober, it doesn't make much difference whether you seasonally adjustthe NOW accounts or not. But whenever the seasonal adjustment factormoves by a large amount, it makes a large difference because NOWaccounts are now $60 billion or whatever.

SPEAKER(?). Well, let's just forget about this--

CHAIRMAN VOLCKER. We have another conversation on [thistelephone line], I guess. Either that or I can't hear somebody.

MR. CORRIGAN. No, there's at least one other conversationgoing on here, Paul.

CHAIRMAN VOLCKER. I don't know whether it's more interestingthan ours. Mr. Secretary, can we clear this up?

MR. ALTMANN. We've been working on it since before we gotstarted.

MR. BLACK. Mr. Chairman, he said what had been done couldn'tbe undone. He must know what the April figure is!

MR. SCHULTZ. I don't think we're in any danger. Anybodylistening in on this conversation is going to be totally confused!

CHAIRMAN VOLCKER. Well, I wish this could get cleared up.Is there any more comment on this?

MR. BALLES. John Balles, Paul. Am I understandingcorrectly--

CHAIRMAN VOLCKER. Just a second, John. We have to get thatother conversation off of here. Can we start it over again or what?

MR. ALTMANN. We can.

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CHAIRMAN VOLCKER. Look, we're going to hang up and startover again.

MR. PARTEE. Communications.

CHAIRMAN VOLCKER. All that fancy telephone [junk] they'veput in here.

MR. PARTEE. Well, that's just for within the Board.

CHAIRMAN VOLCKER. Can't I call someone now and--

MR. PARTEE. That doesn't take care of outside; in fact, wecan't call outside.

MR. ALTMANN. When we started out, at least, we interrupted aconversation.

MR. PARTEE. I thought we had dedicated lines. I didn'tthink that could happen.

MS. TEETERS. Well, maybe it's because they're switching allthe other ones.

MR. PARTEE. What is our range for M-1B adjusted?

MR. AXILROD. 3-1/2 to 6 percent.

MR. PARTEE. So 6 to 9 is distinctly high?

MR. ALTMANN. Oh, I don't think they hear us.

MR. AXILROD. But that's not what it would be quarter--

MS. TEETERS. It's a quarterly target.

MR. PARTEE. Naturally, we get a funny first quarterbecause--

MR. ALTMANN. Does anyone still hear the other voices?I think we need to run down the list once again, which we can doquickly, to make sure we haven't lost anybody. [Secretary's note:All Reserve Banks reported that they had been reconnected.]

CHAIRMAN VOLCKER. I guess we interrupted John Balles, butlet me just say one other thing. The implication of taking this kindof middle course on the seasonal adjustment, which looks best at themoment, is that we're going to have to change it again. At somepoint--I don't know when--we should just be seasonally adjusting thetotal series. You know, two years from now we're going to face thissame problem and what to do about it. Presumably at that point, wemay just shift over and seasonally adjust the whole series.

MR. PARTEE. We'll only have one M-1.

MR. BALLES. Paul, this is John Balles. I was just going toask a couple of questions. It is my understanding, and I'm asking for

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confirmation, that this is the first time the shift-adjusted M-1Bfigures would have been published.

CHAIRMAN VOLCKER. No, we published them in footnotes at theend of every month.

MR. AXILROD. With the wrong seasonal.

CHAIRMAN VOLCKER. They were not seasonally adjusted. We hadthis bastardized series; the demand deposit component was seasonallyadjusted, but not the NOW account component. But those figures withthat earlier seasonal are in the public domain.

MR. BALLES. The one thing that's worrying me is the pointthat some of you will remember from past years when we got into thisseasonal adjustment problem. It is what Arthur Burns used to call the4 equals 12 problem. The different techniques are all equally validbut yield different answers. I'm just wondering whether by publishingthe new seasonals we're adequately going to guard our flank, so tospeak, by pointing out that the seasonals are a matter of somejudgment.

CHAIRMAN VOLCKER. We certainly intend to say that. And it'svery unusual for [alternative techniques] to make so much difference.As I said earlier, I don't think there's any theoretically rightanswer to this. The fact is, first of all, that we don't know theshift adjustment, which bears upon it a little; that's an estimate.But we don't know whether NOW accounts behave the way demand depositsdid before they became a NOW account. There's no way of knowing thatuntil we get some experience.

MR. BALLES. Certainly, these published seasonals will be forweekly as well as for monthly [data]?

CHAIRMAN VOLCKER. Yes.

VICE CHAIRMAN SOLOMON. Paul, this is Solomon. Is the stafftaking one average shift adjustment assumption? Or are they taking itmonth by month as far as where the NOW accounts came from?

CHAIRMAN VOLCKER. Well, we made the arbitrary judgment thatit's two-thirds [from demand deposits], I guess, throughout 1980.Then in 1981 it's month by month. It started at 80 percent, Steve?

MR. AXILROD. It started at 77-1/2 percent out of demanddeposits, then 72-1/2 and 72-1/2 percent. Now we're estimating 70percent for April, but we don't have any real data yet for April.

CHAIRMAN VOLCKER. Okay, did you get that? It's 77-1/2percent for January; 72-1/2 percent for February and March, and aguess of 70 percent for April. That's based upon some analysis ofasking banks and asking consumers.

MR. AXILROD. Also, we did a cross-sectional analysis of9,000 commercial banks through an econometric technique. And we'replanning to--

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CHAIRMAN VOLCKER. Whatever that means, it came out to thesame answer.

MR. MORRIS. Paul, this is Frank Morris. It seems to me thatthe new numbers are a little more compatible with what we know aboutthe real economy than the old numbers were, if that's any consolation.

CHAIRMAN VOLCKER. Yes. Well, it reduces that extraordinaryvelocity in the first quarter by 1-1/2 percent. It's still anextraordinary velocity figure, but it runs in that direction. Whenthey revise the GNP figure downward, we'll lose another 1-1/2.

MR. WINN. Paul, what does this do to M2?

CHAIRMAN VOLCKER. I don't have the M2 figures with me now.

MR. AXILROD. I don't have it.

CHAIRMAN VOLCKER. It's obviously not going to move as muchbecause this is a small part of the M2 series. But I presume it willraise January and February and lower March and whatever estimate wehave for April. I presume I can say this: That it won't change theApril level of M2.

MR. AXILROD. We have M-1B and then we have to seasonallyadjust the other components.

CHAIRMAN VOLCKER. Okay, have we finished with that subject?

MR. WALLICH. Could I ask?

CHAIRMAN VOLCKER. Wait a minute. Henry Wallich.

MR. WALLICH. Have we tried alternative seasonal adjustmentsof the kind that in the past gave us these wide variations?

CHAIRMAN VOLCKER. I'm not sure what you mean.

MR. WALLICH. Have we tried different systems of adjustingthe same data?

CHAIRMAN VOLCKER. Well, we did the two systems. We did justthe straightforward X-11, or whatever it's called, leaving in Aprilthrough September. And we tried it basically by flattening out thoseApril through September figures. Those were the two main alternativesthat were looked at.

MR. AXILROD. Well, one can combine those in a way. We tried6 or 8 different ones because we had this technique that the Chairmanmentioned of, in effect, leaving out part of last year. We also madea similar kind of intervention for late '78 and early '79 when the ATSaccounts were introduced; that would distort the demand depositfigures for M-1A and we had to do something. So we could do it withor without that. And then we used 3 or 4 different methods of tryingto figure out what to do with the other checkable deposits.

MR. WALLICH. But always on the X-11?

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MR. AXILROD. Always on the X-11, which the consultants whowere making the report found to be the best thing to do, although theyhad certain other things they would like to maneuver. But essentiallyit was an X-11 program. We have not found a superior program, but wefelt assured by the consultants in some sense on that.

CHAIRMAN VOLCKER. Let me just repeat something Stevementioned, in case you missed it, because I didn't mention it before.The staff did this same so-called intervention technique, smoothingout a three- or four-month period, when ATS accounts were firstintroduced. This led to a valley in demand deposits at that time.That valley was smoothed out; that was at the of '79, I guess.

MR. AXILROD. '78.

CHAIRMAN VOLCKER. The end of '78.

MR. BLACK. Mr. Chairman, could I ask Steve one minortechnical question? Steve, it looked to us as if the 18 percent Aprilfigure was based on a 72-1/2 and 27-1/2 percent break rather than a 70and 30 percent break. If we are right on that, you'd get a littlelower figure than this with a 70/30 split.

MR. AXILROD. We'll recheck, Bob. That would make about a1/2 point difference.

MR. BLACK. Right, [unintelligible] comes out 74. I don'tknow exactly what it would do on that seasonally adjusted figure thathad been previously shifted; we figured about 0.6 of a percentagepoint on that one.

MR. AXILROD. Well, we'll recheck that. It should have beenworked out on a 70/30 split. We may in the end have to go back to theother, but we'll recheck.

MR. BLACK. Okay.

VICE CHAIRMAN SOLOMON. I'd like to ask Steve a question,too. Forgetting about the seasonal adjustment of the NOW accounts--looking at the regular-type seasonal adjustments--have you assumed asspeedy a check processing by the IRS this April as last April or areyou going back to the earlier pattern?

CHAIRMAN VOLCKER. I think I can answer that. They didn'tassume anything. But that is relevant to the next subject ofdiscussion.

VICE CHAIRMAN SOLOMON. Okay.

MR. AXILROD. Yes, that didn't affect our seasonals. Wecouldn't find any effect. Looking through the data that we have herefor '78, '79, and '80, one can't find any acceleration in collectionsover the course of April. A little more was collected in April in thepast two years relative to earlier years, in terms of percentagedistribution. But over the course of April you can't find anyacceleration in collection looking at '78, '79, and '80. In '81 theremight have been; it looks as if a little more was collected throughApril 28--leaving out two days in the month--than in earlier Aprils.

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MR. CORRIGAN. Paul, may I ask one other question, please?Somebody mentioned M2. When we swing over and incorporate the newseasonal for M-1B, is anything going to be done in terms of the factthat the money market funds component of M2 is also not seasonallyadjusted?

MR. AXILROD. We hadn't been planning on it. I don't thinkwe have any experience whatsoever to find the seasonal on that.

MR. CORRIGAN. I don't suppose you do, but I just raised thequestion because those--

CHAIRMAN VOLCKER. It's the same kind of problem in theory.

MR. CORRIGAN. I know it's the same problem in theory. Thequestion that has been running through my mind is: Is there any meritat all to applying the same solution to the problem, recognizing thatthe solution is imperfect?

MR. AXILROD. Well, one trouble, Jerry, is that here we feltreasonably confident about how much was coming out of demand deposits.And there we literally have no idea, and it's probably small.

MR. CORRIGAN. That's true.

MR. AXILROD. We don't know what came out of Treasury billsand what came out of savings accounts. It seems to me that it wouldbe almost an impossible problem. And one would hope, since M2 is sobig--it's $1.7 trillion--that [the seasonal effects] would get muchmore swallowed up in M2 than they are getting swallowed up in M-1B.

MR. CORRIGAN. It might not be a bad idea to mention that inyour explanation. Having done this with other checkable deposits isgoing to draw attention to the fact that we haven't done anythingthere and [that will] then raise more questions.

MR. AXILROD. We didn't seasonally adjust other checkabledeposits separately. That ought to be clear. What we did for M-1B--

MR. CORRIGAN. I understand.

MR. AXILROD. --was the seasonally adjusted total of demanddeposits plus two-thirds or whatever fraction of other checkabledeposits.

MR. CORRIGAN. I understand what you did, Steve. I'm justraising the point that it might be a bad idea to be totally silent.

CHAIRMAN VOLCKER. Yes, I think you're probably right. Maybewe ought to fiddle around just for our own edification to see whatdifference it makes. We have time. I should mention one other thing,just for the sake of completeness, so long as we have M-1A. That isbeing seasonally adjusted with a demand deposit seasonal, which isprobably wrong theoretically because a certain type of demanddeposits, namely consumer demand deposits, is a smaller component ofthat now and that presumably changes the seasonal. But we don't knowhow [it does so] and there's nothing much we can do about it.

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If that is behind us, let me just introduce the more currentdiscussion by saying that, obviously, we have a high April figure. Wehave had upward revisions for about three weeks, which is always anominous sign to me. Last week's preliminary number showed a fairlysizable decline. By the time we got around to publishing it--everyday it got whittled down--it was practically no decline. At the sametime, we have this high preliminary figure for the [week] we willpublish next. And that is a little surprising, just with reference tothe earlier question, because if the IRS is really processing taxpayments more quickly, one would have expected a seasonally adjusteddecline. I don't know what up-to-date information we have on that. Ikeep hearing that they are doing it quickly but, if that is reallytrue, it makes the increase even more ominous. Let me just say thatfor several weeks the reserve path would have indicated sometightening; and in some statistical sense, that was right. But themarket hasn't reflected it until the last day or two; it is nowreflecting it quite strongly. But last week, on these normalconventions we use, we expected borrowing to be $1-1/2 billion and itwas well below $1 billion because instead of having positive excessreserves we had minus excess reserves of $450 million. That isbigger, I understand, than anybody has been able to find in recordedhistory. Let me have Steve describe the last few weeks and theoutlook and then Peter can describe the market.

MR. AXILROD. Well, Mr. Chairman, just to step back a minute,I think the Committee will recall that two weeks ago we were expectingborrowing to rise to about $1.3 billion, given the shortfall we had inborrowing in the week of April 8th. In the event, in the week ofApril 15th, we did get borrowing of close to that; it was $1.1billion. [As a result] of an overshoot in market factors affectingreserves, we had somewhat higher nonborrowed reserves in the week ofthe 15th--by about $100 million or so--because, as I say, on Wednesdaymarket factors supplied more reserves than projections had suggestedthey would. On April 22, the week just past, we had assumed thenonborrowed path implied borrowing of $1-1/2 billion. Again the Deskwas very close to path; in fact, Peter, if my memory's right, we endedup a little below path even, and borrowing turned out to be only $864million. That was because, instead, the market reduced excessreserves by $700 million from a plus $300 million that we thoughtthey'd have to a minus $435 million. That was the actual number. So,borrowing, in effect, was $700 million less than planned and there wasvery little pressure on the markets, even with this large negativeexcess reserve number. Given the shortfall in borrowing in that week,borrowing falling out of the path for the current week, the weekending April 29th, looked like $1.7 billion. And we left the paththere, implying that level of borrowing for the current week. In avery technical sense, it turned out that the data we got last Fridaysuggested more downward multiplier adjustments than we had made. Wehad made none because we had evidence of only small amounts, but itsuddenly got large. And if all those had been made that were possibleto make, this $1.7 billion would have risen to an order of magnitudeof $2-1/2 to $2-3/4 billion.

Now, this week is the end of a so-called four-week period;and for the next three weeks the path would have implied borrowing of$1.7 billion. So, in a sense, to smooth the transition between thetwo paths we left in that $1.7 billion for the week of the 29th; itwould move toward $1.7 billion in the weeks of the 6th, 13th, and the

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20th. That $1.7 billion in this forthcoming three-week periodreflects essentially the strength in required reserves above what onewould have expected if we were on target with the Committee'sobjectives for M-1B and M2. In essence, it's M-1B that is running alot stronger than had been expected and that is strengthening therequired reserves. It's also, of course, strengthening the totalreserves; with borrowing running at $1.7 billion, total reserves arerunning about $500 million above the path for total reserves that hadbeen set at the time of the Committee's meeting. Over the next threeweeks we would expect total reserves to be coming in about $500million above the path. So, this level of borrowing of $1.7 billiondoes not reflect any downward adjustment in the nonborrowed reservepath to compensate, as it were, for the increased bank demand forreserves and to try to put even more pressure on the banking system.It is at the moment, as it were, the minimal borrowing that would fallout of just merely holding the nonborrowed path where we were. As theChairman mentioned, the funds market, yesterday and today, isbeginning to show the pressures of the squeeze on reserve availabilityrelative to demand; but the market didn't show it for a couple ofweeks--last week largely because of this sharp drop in [demands for]excess. Prior to that, the market was just going ahead as if thefunds rate wouldn't change and banks didn't do any borrowing untilextremely late in the statement week.

CHAIRMAN VOLCKER. Peter, do you want to report on your viewof what has happened here?

MR. STERNLIGHT. Well, as you said, Mr. Chairman, the bankingsystem has been slow in catching up with the increased degree ofpressures that should be falling on it as the aggregates strengthenedand as their demand for reserves grew. Much of that, as Steve noted,is that they just didn't cover their reserve needs last week. Butyesterday and today it is catching up more forcibly so that the fundsrate, which had been averaging pretty close to 15-1/2 percent for afew weeks, was around 16 percent yesterday. Today it started outaround 16 percent but it got up to the 17-1/2 percent area. We'relooking at a very large reserve need in this week just to meet path.And even if we met path, there would still be a need; but becauseavailable collateral has been in short supply we haven't been able toput in very many of the reserves that we had planned to supply today.We said [when we presented] our program this morning that we would beputting in something like $4 billion in two-day RPs and we've onlybeen shown about $1-1/2 billion; we may do a couple of hundred millionor more than that later. So, we're building up to what looks like avery large reserve need and borrowing need over today and tomorrow.Probably most of it will fall on tomorrow. That's all I have, Mr.Chairman.

CHAIRMAN VOLCKER. Well, we have a situation where we havehad some statistical pressure, but it was all in the statistics andnot in the market until very recently. And now this statisticalpressure may be even greater just because technically we can't get thereserves in. That may be a good thing; I don't know. But there isgoing to be a lot of borrowing, I suspect, today and tomorrow, asPeter suggested. It will probably be tomorrow because there has beenno eagerness to borrow before people are really under the gun. Idon't think we require, in any technical sense, any Committeedecision. What I would plan here--and we can discuss it--is that we

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might think of taking some of the adjustment implied by the high levelof total reserves, which we would normally do in this kind ofcircumstance. Since even without that we have a level of borrowinggoing toward $1.7 billion, if these calculations mean anything, thatdoes imply a sharply tighter market for the next few weeks unless themoney supply turns around. Obviously, this high figure, which issupposed to be published on Friday, hasn't been confirmed yet. Myshort-run error analysis says it's going to go even higher than thepreliminary figure. But we don't have anything for the following weekyet; and if we have a big decline, then things will look quitedifferent for May. But I just have no evidence of that at all at thispoint. And if something is going on here in the tax collection areathat is affecting this--we do know these are extremely difficult weeksbecause of the big tax collections--we just don't know how it'saffecting these weekly figures. One other thing I should mention inthis connection is that, while we're obviously above the path that weset at the last Committee meeting, we are still, I understand--butSteve better confirm this--just slightly below the midpoint of thebasic annual path.

MR. AXILROD. Yes. On the new numbers we would be $300million, and on the old numbers $500 million, below the midpoint.

MS. TEETERS. May I ask a question?

CHAIRMAN VOLCKER. Sure.

MS. TEETERS. Steve, you said that you thought the totalborrowing would end up about $500 million above the path. Is thatcorrect?

MR. AXILROD. Yes, $500 million above where it had beenoriginally set by the Committee at $1150 million.

MS. TEETERS. Now, if we adjust for that, won't that justsend the borrowing up to [nearly] $2.3 billion instead of $1.7billion? Won't the total reserves be approximately the same, and wewould just be adjusting the split between borrowed and nonborrowed?

MR. AXILROD. In the very short run, that may be the result.Of course, the question would then be: Over a longer run than two orthree weeks, would it begin to cause faster adjustments in the moneysupply back toward the Committee's path?

MS. TEETERS. So the short-run decision here is whether weshoot the borrowings up to $2.3 billion, is that correct?

MR. AXILROD. No, I don't think--

CHAIRMAN VOLCKER. Well, we won't go all that way, I don'tthink, but typically we take a partial--

MR. AXILROD. Governor Teeters, maybe I wasn't clear enough.What I tried to say was that if the full multiplier adjustment hadbeen made--. We divide the period into a four-week and a three-weekperiod. We're now in the last week of the first four-week period. Wegot a surprising downward multiplier adjustment. If we had taken thatin the current week, we could have had borrowing as high as $2.7

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billion. We didn't because, without doing it, borrowing was $1.7billion and taking that multiplier adjustment for the next three-weekperiod would have left the borrowing at $1.7 billion. So, in effect,we just left one week of it off.

MS. TEETERS. But any of the actions that you are talkingabout now implies borrowing rising?

CHAIRMAN VOLCKER. Yes.

MR. AXILROD. Yes, that is right.

MR. PARTEE. Right.

CHAIRMAN VOLCKER. Just let me interject another question.Does anybody have a feel about what economic activity is doing now? Iwould personally volunteer that on the basis of very little--justcasual comments one picks up--I don't have a feeling that April was aterribly weak month. Quite the contrary. But I don't know whetheranybody out there is getting a feel on the change in the businesssituation.

VICE CHAIRMAN SOLOMON. Paul, I have the impression frompeople I've been talking to in the financial market--not businesspeople so much--who are following this very closely that they expect asignificantly higher rate of real growth than the completely flatforecast that the staff had last time. People here are talking about1-1/2 to 2 percent real GNP in the second quarter. Has the staffrevised its forecast for the second quarter?

MR. KICHLINE. No, we have not at this point. I would notthink that the difference between zero and 2 or zero and 1-1/2 percentwould be that large. I think if we were to take all the incominginformation available and redo the forecast, we'd be close to verylittle growth, which I define as within that kind of range.

VICE CHAIRMAN SOLOMON. Well, let me make a general commentthen. It seems to me that there is a much greater probability ofovershooting in the second half of the year, and I think we want totake as much advantage of undershooting as we can get in the meantimeso that we don't repeat the pattern of the second half of last year.It would seem to me, therefore, notwithstanding the big seasonalquestion mark for April, that it would be best to reduce thenonborrowed reserve path substantially, let the fed funds rate moveup, and not be as timid and as late as we were in the second half oflast year. I think it's quite clear, even if the tax cut gets delayeduntil October 1st, that with defense spending building up the way itis and the very big real increase in business spending that we've beenseeing we're going to have a heck of a problem later on. So, myinstinct would be to move quite vigorously, to the extent that we workout the adjustment of the nonborrowed reserve path.

MR. SCHULTZ. This is Fred Schultz. I agree with thatstatement.

MR. BLACK. This is Bob Black. I do, too. I think theseseasonals will scare the devil out of the market even though they're atouch below what we originally thought.

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MR. PARTEE. This is Chuck Partee. I don't think it's somuch a question of undershooting, Tony. I think our problem may nowbe that we're beginning to move into a surge that will give us anovershoot right now, regardless of what happens in the second half ofthe year. I realize all these seasonal changes are very complicatedand confusing, but whether we say that March was 8.2 percent and Aprillooks like 18 percent or that March was 7.3 percent and April lookslike 13.6 percent, they both have the smell of a surge in growth thatis awfully difficult to control and awfully difficult to know how farit might go. So, I would agree with the thrust of your remarks, andthose of others, too, in that I think we have to resist this and wehave to resist it strongly--not so much to save our pennies for thesecond half, but to keep within a reasonable range right now.

CHAIRMAN VOLCKER. April has used up our pennies.

MR. MORRIS. This is Frank Morris. I would agree with Chuckand Tony. One other element in the picture is that, while the M-1Bfigure may be near the middle of the range, the broader aggregates,which are probably more reliable guides now, are above the tops oftheir ranges.

CHAIRMAN VOLCKER. That is correct. I haven't got thosefigures right in front of me but they are all hovering just above or alittle more than above the top of their ranges. They are also notshowing this surge and this seasonal [adjustment revision] shouldn'tchange that. You're quite right that they're high. If anything,they're showing somewhat decelerated growth but they are high.

MR. WALLICH. This is Henry Wallich. I think we need to showa strong effort to get the aggregates back on track. We want to do agood job. Also, we don't want to lose further credibility. Thequestion is how we should do this. One way is to lower thenonborrowed path. The other would be to increase the discount rateand surcharge. That clearly would be a more visible action.

SPEAKER(?). Sure.

VICE CHAIRMAN SOLOMON. Henry, I think it's a littlepremature to move that quickly on the discount rate, given thequestion mark of April. Right now we could lower the nonborrowedreserve path pretty strongly but at the same time keep an eye on thediscount rate. [The picture] may begin to sharpen and we could movethen.

CHAIRMAN VOLCKER. Well, obviously the discount rate questionarises here. We're not going to make that decision today.

MR. BOYKIN. This is Boykin. I would agree very much withwhat Tony Solomon has been saying.

MR. WALLICH. Henry Wallich. I've always argued for a higherupper limit on the funds rate, and this may be my chance for testingyour feeling on that. It's now 13 to 18 percent, isn't it?

CHAIRMAN VOLCKER. Yes, I'm at your service. But I don'tthink we have to take any Committee [actions] today. That would beone. This situation may bear some watching and we may want to have

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another telephone meeting next week because what this next moneysupply figure shows, I think, could be quite important in view of allthis uncertainty surrounding the tax [processing]. I think we have toplay it safe now--defining safe as has been discussed--but thingscould look either quite worse or better very quickly.

MR. GRAMLEY. Mr. Chairman, Lyle Gramley. I would supportthat. We have a piece of information coming out this week on Friday--the employment report for April--that will be quite useful in findingout whether our judgments on the second quarter are right or wrong.In general, I think the economy this year has been a lot stronger thananybody had expected. The first quarter may get revised but, if itdoes, it could just as well get revised up as down. The inventoryfigures assumed for March look funny. And I have come to theconclusion that interest rates are not high enough yet to controleither economic growth generally or money supply growth in line withthe Committee's desires. So, I think it is time to move now on thenonborrowed reserve path. Then, if on Friday we see figures onemployment that indicate that the economy is still going likegangbusters in the second quarter, we can take the next action: thatis, to change the fed funds rate range.

MR. CORRIGAN. This is Jerry Corrigan. I will be brief. Iagree with almost everything that has been said, certainly in terms ofadjusting the nonborrowed path now.

MR. BALLES. This is John Balles. I would add my support tothat proposal. I would also want to keep a careful eye on thatdiscount rate in case we [get the] higher funds rate that appears tobe in prospect.

MR. ROOS. This is Larry Roos. I want to agree with thereduction of the nonborrowed reserve path and with almost everythingthat has been said.

MR. SMOOT. Philadelphia can agree with that also.

MR. DOYLE. This is Dan Doyle in Chicago. I would certainlyagree with the general direction here, but I have to point out like abroken record that this part of the country in particular, as itreflects the auto industry and housing, is still in a very bearishsituation. And, if anything, those sales numbers are expected todeteriorate rather markedly over the next several weeks.

CHAIRMAN VOLCKER. You remind me to note, in connection withthe broader aggregates, that bank credit, which was quite strongearlier in the year, is quite weak now. It's still above the range asI remember, but that is the one measure that has shown the mostpronounced weakness recently.

VICE CHAIRMAN SOLOMON. That may be, when you add the foreignbranches in. The bond market and commercial paper market all togetherdo not add up to a weak credit picture, though.

MR. RICE. This is Emmett Rice. I agree with most of whateverybody has said here, particularly with what Chuck said.

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CHAIRMAN VOLCKER. Well, I don't know if anybody else wantsto say anything. I think, at this stage, this is not a Committeedecision in any formal sense. We are confirming that we will tightenup the nonborrowed path, which is what we would normally do undercircumstances of this sort.

MR. PARTEE. Do you have a feeling for how much, Paul? Acouple hundred million?

CHAIRMAN VOLCKER. I would say we have a choice between $200or $300 million, I suppose.

MR. AXILROD. I should mention that when I said totalreserves are running $500 million above the path, that assumed acertain multiplier adjustment. These things change quite rapidly.

CHAIRMAN VOLCKER. These get looked at every week in thatsense.

MR. AXILROD. So, by Friday it may--

CHAIRMAN VOLCKER. I think I am correct, but I stand to becorrected if I'm not right, that we have not had borrowings above $2billion. Late last year when we had the maximum tightness, theborrowing level was something short of $2 billion, as I remember it.

MS. TEETERS. Well, on Wednesday--

MR. AXILROD. Borrowing was $2.1 billion on average inNovember 1980, and in December it was $1.7 billion.

CHAIRMAN VOLCKER. Okay, I stand corrected. It got a littleover $2 billion, right?

MR. PARTEE. It's tight, though; there's no question aboutit.

MR. GUFFEY. Mr. Chairman, Roger Guffey. If I understandwhere everything ends up--and you appear to have a fairly goodconsensus--we're talking about dropping the nonborrowed path, which Iassume would elevate our borrowing level above the $1.7 billion thatSteve was talking about earlier.

CHAIRMAN VOLCKER. Yes.

MR. GUFFEY. My understanding, at least according to mystaff, is that that implies an interest rate level that is at least atthe top of the range--18 percent--and quite likely something more than18 percent.

CHAIRMAN VOLCKER. Well, maybe yes. I would say it's quitelikely, too. But the reserve path that we had for the last threeweeks should have been implying a federal funds rate about 2percentage points higher than it in fact was. So, unfortunately,those guesses are not too reliable. But I think you're probably rightthat the market has gotten in a different mood after the last coupleof days or is getting there.

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MR. GUFFEY. I think that's right, Mr. Chairman. I'd like tosuggest that this time we observe the upper limits for the purpose ofconsultation and that at the time we crack through the 18 percent wehave another telephone session.

CHAIRMAN VOLCKER. Well, I think we have to have one if itgoes above 18 percent. But I was not suggesting that we just stop itat 18 percent.

MR. GUFFEY. Well, [with] the path on the down side, I'd justlike to urge that we have a consultation at or near 18 percent.

CHAIRMAN VOLCKER. Well, we won't let it go too long beforehaving a consultation. Any other comment? I think we have disposedof everything that I had on my mind. Thank you.

MR. WINN. Paul, do you get any indication of institutionalstresses and strains?

MR. ALTMANN. He said: "Any indications of institutionalstress or strain?"

CHAIRMAN VOLCKER. I'm just getting your question repeated tome, Willis. I haven't gotten anything new, no.

MR. WINN. I was just wondering if the interest rate pickupis going to cause panic in certain sectors.

CHAIRMAN VOLCKER. That has been so recent. What issurprising here is that the market has just refused to go up despitethis statistical tightening.

MR. WINN. I agree.

VICE CHAIRMAN SOLOMON. Has any progress been made, Paul, onthe regulatory proposal?

CHAIRMAN VOLCKER. Well, we are in rather intensiveconsultation with Congress, and I guess the answer to that question is"yes." The Administration is remaining in a posture of silence on thething basically. But we are going ahead and trying to get adefinitive bill, in consultation with the Congress. We are right inthe midst of that process now and maybe by the end of the week we willhave a definitive version.

MR. SCHULTZ. The Secretary of the Treasury said this morningthat they were watching the situation and did not believe it to becritical and were not ready to propose any legislation. That,however, is not the position of the regulatory agencies.

VICE CHAIRMAN SOLOMON. I've looked at the mutual savingsbanks in New York and for some of them the situation is going to bequite bad by the first quarter of next year. A few of them, ahandful, are going to have a very major problem.

CHAIRMAN VOLCKER. I'm glad this question was raised. Let mejust say one thing in that connection and one thing in anotherconnection. We're in the midst of this consultation process now. It

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may be that when we get a bill it would be useful for you people tohave a meeting with your thrift advisory committees or whateverequivalent you may have at your particular Bank to bring them up todate and talk with them about it. We have a potential problem oflegislative tactics and all the rest in trying to get this billthrough in a hurry with a minimum of controversy. And that requires,among other things, that the thrifts not bring out their laundry listof highly controversial amendments that they might want to make suchas restoring differentials on money market certificates, doingsomething about money market funds, and mortgage warehousing schemes.

MR. PARTEE. Real estate.

CHAIRMAN VOLCKER. They have all sorts of proposals or wishlists, none of which, in my judgment, can conceivably go anyplace atthe moment. And they would only make it difficult to pass thislegislation if they press to try to amend the bill. I think this billis in their interest, but they have to see it in their interest andlet it go through and fight their other battles later. I don't knowwhether they will take that position or not. I suppose some of themwill and some of them won't. I think what makes people edgy either inthe Congress or among some of the trade associations is any smell ofbank takeovers in extremis, which is in the bill, or any interstatemergers or acquisitions, which is also in the bill as kind of a lastresort measure in the case of failing institutions. The capitalinjection side I don't think is going to raise many hackles, but thisother stuff might.

VICE CHAIRMAN SOLOMON. Some of them also are very unhappyabout conditions that might be laid down such as salary [constraints].

CHAIRMAN VOLCKER. I saw an article to that effect in theAmerican Banker this morning. I've heard no discussion aboutsalaries. It is true that there's nothing in the bill aboutconditions, but presumably the agencies would put on conditions, atleast of a standby kind. They would write a contract--this has beentheir practice--that would give them very strong residual authority ina great many areas. I think that's part of the price they're going tohave to pay. But it's not in the bill itself as now written. Now,this is all subject to further negotiation. The bill itself is one ofthose things that you can't understand when you read it because itamends a lot of existing language in random fashion. But it basicallyhas only three provisions: authority for liberalizing capitalinjections; cleaning up some issues regarding mergers and acquisitionsof failing institutions or at least broadening that authority; andadding a bit to the FSLIC draw on the Treasury. That's all that's inthe bill.

VICE CHAIRMAN SOLOMON. When do you want us to consult, afterpublication of the bill?

CHAIRMAN VOLCKER. I don't know myself. We may do a littleconsultation with the national associations, but we haven't decidedwhether to do so before the bill goes up or when the bill goes up.So, I don't know [the answer to] that yet. There are conflictingfeelings on the Hill about that. I wouldn't do anything at themoment, but I'd just be ready to do it.

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The other thing I wanted to mention, and I don't think weought to take any more time now, is that as time passes, I keepwondering about the attitude of the banks toward the discount window.We have the same dilemmas there that we've had before. I'm a littlesuspicious that one of the reasons that on some occasions we don'thave much reaction in the market to a statistical tightening is thatthe banks all sit there and figure they can borrow from the discountwindow at the end of the week. We may want to do a little thinkingabout talking with some of the banks, if they're persistently runningreserve deficits and not borrowing during the week but then popping inlate on Wednesday afternoon when we can't say much to them. That'sall I have. I'll resume my conclusion. Thank you.

END OF SESSION